Best Practice #9: Adopting Available "Trust" Safe Harbors

Welcome to the Alliant Best Practices Series for 401(k) Plan Sponsors, in which we offer 10 best-practice essentials for helping plan participants achieve retirement plan success. Here’s the ninth best practice in our series.


Our last post focused on the importance of adopting a fiduciary government program. In this post we’ll talk about ERISA “Trust” safe harbors. Trust safe harbors, unlike the commonly referred to “safe harbor plan” which helps the plan pass administrative testing requirements, are an effective method to mitigate or reduce the potential liability plan sponsors face as Trustees of their plan as they manage plan investments.

As an employer or high-ranking company manager, it is in your interests to understand safe harbor options as your corporate retirement plan grows. Why? Because as your plan grows, so too does the liability for ensuring that the plan is managed in a reasonable and accountable fashion.

The 3(38) Fiduciary Investment Manager Option

Under this option, responsibility for investment decisions shifts to a delegated “prudent expert,” most commonly a Registered Investment Advisor®, who agrees to become a plan fiduciary with total responsibility for selection and monitoring of plan investment options. A 3(38) Fiduciary Investment Manager is the only type of investment manager who can remove all investment liability from the plan sponsor. Since it requires a high degree of sophistication and accountability, many financial firms are unable or unwilling to act in this capacity. For example, under ERISA a broker-dealer cannot act as a 3(38) Fiduciary Investment Manager, and only rarely will insurance companies or banks do so.

It is important to remember that a 3(38) Fiduciary Investment Manager does not absolve the plan sponsor of all liability. The plan sponsor still bears the responsibility of monitoring the activities of the 3(38) Fiduciary Investment Manager to ensure that they are performing their duties properly. Plan sponsors must also be able to demonstrate that the “prudent expert” was selected via a reasonable “due diligence process.”. Lastly, be sure that any advisor claiming to offer 3(38) services accepts their responsibility in writing and clearly states they will provide “discretionary” investment management.

The 404(c) Participant-Directed Safe Harbor

Most 401(k) plans are self-directed. In such a plan, participants themselves make their own investment decisions. Absent compliance with ERISA Code Section 404(c) plan sponsors can be held responsible for poor investment decisions made by their plan participants. 404(c) absolves the plan sponsor of all participant investment decisions. Compliance with 404(c) requires disclosure to participants that the sponsor is not responsible for participant investment decisions and intends to afford itself of the fiduciary relief found in 404(c). The sponsor must provide a broad range of investments options for the participant to choose from, allow, at a minimum, quarterly investment election changes, and provide sufficient information to participants to help them make informed investment decisions.

The 404(c)5 Qualified Default Investment Alternative (QDIA) Safe Harbor

The QDIA protects employers from liability if contributions are made to the plan absent investment direction from an employee. All plans have a “default” investment option. If the investment option meets the qualifications laid out by 404(c)(5) it becomes qualified and participants have no recourse should they leave their funds in the QDIA and later do not appreciate the investment outcome. Like 404(c), 404(c)(5) requires participant disclosure, in this case annually.

In Conclusion

There are numerous options for plan sponsors who wish to mitigate their risk by adopting an ERISA “Trust” safe harbor option. There is more to each of these options than can be covered in a blog post, however, and which would require speaking to a 401(k) specialist.

Next up: Utilize Available Technology. Is your plan making the best use of technology? We will discuss this in our next post – stay tuned!

Do you like what you’ve read so far in our Best Practice Series for 401(k) Plan Sponsors? We also offer a complimentary presentation to further explore these best practices with you and other key retirement-plan decision-makers at your company. Please contact us to learn more.

This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.

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